The Dollar’s Political Journey

Is the sudden fall of the US Dollar a cause or a consequence of political conflicts?

The US Dollar defines overall economic and political issues in the world. With Trump on the throne of the United States, global uncertainty and political conflicts are, apparently, inevitable, and the USD seems to be one of the first few victims. Just less than 100 days of stepping into his Presidential shoes, he has managed to create political upheaval and societal outcries. According to Trump, most of the former political decisions of the US Government had negative economic effects on the US. So, he plans to impose many changes in foreign relationships. Sharp and direct in his address and sometimes even ruthless towards some nations, Trump has already angered many world leaders. As a currency that is one of the common denominations in the international arena, it has started showing signs of political influence and unrest. Though the US Dollar recorded a sharp rise of 5.6% with the arrival of a new President, in January this year there was a decline of 2%, which is the lowest value over the same period since January 2006 when was the highest drop of 2.4%.

The most blatant problem is with central banks. Since most of them hold their reserves in Dollars, their decisions any which ways affect the US Dollar value. Reserves in Dollars means a rise in reserves when the Dollar appreciates. In quite an autocratic sense, the current US administration has not left China, Japan and Germany, in the performance of the Dollar. The accusations that the economies are deliberately and artificially holding high value of the Dollar to weaken their currencies to be more competitive in exports, seems the ongoing ‘exposition’ that the world needs to hear. And to that, the pre-calibrated answer remains high tariffs on their imports. However, if these countries decide, for example, to diversify the currency in their investments, this will decrease the US Dollar value. It’s enough if they stop buying more Dollars and the damage for the US is inevitable, let alone if, for example, China, with such large reserves in Dollars, decides to change the currency in, say, the euro.

The value of the currency also depends on the expectations of the investors or how much they think it is worth. If Dollar-denominated investments prevail, this positively affects the value of the US Dollar through increasing demand for it. Due to the announcement that taxes will be reduced, the Dollar should increase. But, as investors probably expect a high global uncertainty, because international trade agreements are jeopardized, considering the Trump’s decisions on this matter, there is higher probability of currency switches by such investors. This would decrease the Dollar’s value. However, it cannot be excluded that, this actually was Trump’s plan. A weaker Dollar makes imported goods much more expensive than domestic, which would encourage people to buy more the domestic over the foreign goods. The target of reducing deficit may be fulfilled in this direction.

On the other hand, given the changes in monetary and fiscal policies in the US, and that Europe and Asia, especially China, will certainly not stop their economic growth, it is evident that it is more realistic to expect that the Dollar will continue to rise rather than to fall. Emerging economies will especially influence the Dollar, and this cannot be a phenomenon to ignore.